2006a). Aggregation of Heterogeneous Beliefs

This paper is a generalization of Calvet et al. (2002) to a dynamic set-ting. We propose a method to aggregate heterogeneous individual probabil-ity beliefs, in dynamic and complete asset markets, into a single consensus probability belief. This consensus probability belief, if commonly shared by all investors, generates the same equilibrium prices as well as the same individual marginal valuation as in the original heterogeneous probability beliefs setting. As in Calvet et al. (2002), the construction stands on a ctitious adjustment of the market portfolio. The adjustment process re-ects the aggregation bias due to the diversity of beliefs. In this setting, the construction of a representative agent is shown to be also valid. 1